2017 (5) TMI 1651 - AT - Income Tax

Capacity under-utilization adjustment - assessee has claimed the adjustment on account of under-utilisation of capacity and particularly on account of cost of employees and cost of rental which remained unutilized - Held that - The assesseehas not given the proper details as well as evidences to show the level of capacity of utilization of the assessee as well as comparable companies. The learned Authorised Representative of the assessee has submitted that it was not feasible for the assessee to give all the details of the comparable companies regarding capacity utilization. We do not find any merit in the claim of the assessee when the assessee failed to produce the relevant details regarding the level of capacity utilization of each and every comparable company in comparison to the assessee s capacity utilization. Therefore in the absence of necessary details and evidences this ground of the assessee s appeal is rejected. TPA - determination of Arm s Length Price (ALP) - Comparable selection - turnover and size are relevant factor for selecting the comparable companies for the purpose of determining the ALP however a proper parameter of turnover has to be applied - Held that - Tribunal is taking a consistent view of applying the turnover filter of 10 times of assessee s turnover on both sides for selecting the comparable companies. Further the RPT is also a relevant factor for selecting comparable companies though the comparable price should be uncontrolled and unrelated however it is not possible to find a company without having RPT therefore in due course of consideration and in analyzing this issue this Tribunal has taken a view that a tolerance range of 5% to 25% can be considered depending upon the availability of the comparable companies. Accordingly in normal course 15% of RPT can be a tolerance range for selection of comparable entity. Since the TPO has not applied and also not given the details of turnover as well as RPT of the comparable. Therefore we are of the considered opinion that the entire issue of TP Adjustment requires a fresh consideration at the level of TPO. Provision towards Long Term Retention Bonus - AO held that this amount is a provision and accordingly he has added back the said amount to the income of the assessee - Held that - We find that even if provision is made towards the accrued bonus on account of length of service of the employee then the actual payment may be made in the subsequent year or in future but the liability cannot be treated as uncertain. Therefore in view of the decision in the case of Bharat Earth Movers 2000 (8) TMI 4 - SUPREME COURT the provision made towards accrued long term retained bonus is an allowable claim. Accordingly the Assessing Officer is directed to allow the claim of the assessee after verification of the quantum which has accrued as a bonus to the employees though the payment may be paid in future. Rent equilisation provision - AO found that the amount is a provision and cannot be recognized as a certain liability - Held that - Though the assessee has debited a sum of 11, 86, 981 as part of rent expenditure however no record has been furnished by the assessee to show how this liability has arisen and what is the basis of this liability. We further note that the assessee has even not filed the rent agreement under which this liability is claimed to be discharged by the assessee in future. In the case on hand the assessee has failed to produce the primary evidence on the basis of which the liability has been recognized and provision is made. Accordingly we do not find any reason to interfere with the orders of the authorities below qua this issue. Disallowance under Section 14A r.w. Rule 8D on account of interest as well as common administrative expenses - Held that - We find that when the assessee has not shown any interest expenditure in the profit and loss account then no disallowance is called for on account of interest expenditure under Section 14A - As regards the administrative expenditure that the assessee has claimed that it has not incurred any expenditure for earning the exempt income however we find that in the investment portfolio of assessee there is a significant change and movement. The balance as on 31.3.2007 was 30, 85, 00, 000 which has been reduced to 7, 06, 00, 000 which shows a significant change in the investment portfolio and the assessee has taken a decision to sell the securities/shares during the year under consideration. The decision of making fresh investment or selling the existing investment is taken at a very high level of management therefore it cannot be accepted that the assessee has not incurred any expenditure for earning the dividend income. Accordingly when there is a change and reshuffling in the investment portfolio then the indirect expenditure is bound to be incurred which is allocable to the tax exempt income - we confirm the disallowance made by the Assessing Officer on account of administrative expenses and delete the disallowance made by the Assessing Officer on account of interest expenditure. Disallowance of provision towards creditor - AO noted that the assessee has not complied with the TDS provision as required under Section 40(a)(ia) - Held that - As regards the telephone expenses payable to Tata Teleservices we find that though the amount was not paid till date however if the amount was accrued during the year then the claim of expenditure cannot be disallowed on the ground of non-deduction of TDS as the TDS provisions are not applicable on such expenditure. Accordingly this amount of 20, 00, 000 is an allowable claim. As regards Office Rent since the assessee has not complied with the TDS provisions therefore the provisions of Section 40(a)(ia) are attracted on this amount. As regards repairs and maintenance payable to two different parties again the Assessing Officer has recorded that the assessee has not complied with the provisions of TDS. Since the Assessing Officer has not discussed relevant provisions under Chapter XVII of IT Act under which the TDS is required to be deducted in respect of these amounts of expenditure therefore it is not clear how the provisions of Section 40(a)(ia) are applicable on this amount. Accordingly we direct the Assessing Officer to properly examine the relevant provisions of Chapter XVII qua these payments on account of repairs and maintenance and then decide the issue. As regards the staff welfare expenses the Assessing Officer has disallowed this amount on the ground that it is a provision on estimate basis but no estimation has been provided by the assessee - if an amount has accrued in respect of staff welfare expenses then the payment of the same in future cannot be a ground for disallowance of expenditure. However since the assessee has not provided the necessary details to show that this expenditure is already accrued on account of staff welfare therefore we do not find any reason to interfere with the order of the Assessing Officer qua this issue. Appeal of the assessee is partly allowed. TPA - Comparable selection - Held that - Assessee is in the business of providing software development services thus companies functionally dissimilar with that of assessee need to be deselected from final list. Regarding software expenditure disallowed by treating the same as capital in nature - Held that - We find that the details and nature of the expenditure is mentioned in the invoice / bills. However the Assessing Officer has not conducted a proper enquiry and verification regarding the nature of expenditure incurred by the assessee from the invoices / bills. Accordingly in view of the facts and circumstances of the case we set aside this issue to the record of the Assessing Officer for re-adjudication of this issue after verification of the invoices / bills as well as in the light of the decision of the Special Bench of the Tribunal in the case of Amway India Enterprises v. Dy. CIT 2008 (2) TMI 454 - ITAT DELHI-C .

Summary

Issues Involved:
1. Validity of Reference to Transfer Pricing Officer (TPO)
2. Fresh Comparable Search by TPO
3. Rejection of Comparable Uncontrolled Price (CUP) Method
4. Capacity Under-utilization Adjustment
5. Determination of Arm's Length Price (ALP) and TP Adjustment
6. Erroneous Data Used by AO/TPO
7. Non-Allowance of Appropriate Adjustments to Comparable Companies
8. Variation of 5% from Arithmetic Mean
9. Validity of DRP Directions and Final Order
10. Addition on Account of Provisions
11. Rent Equalization Provision
12. Disallowance under Section 14A
13. Disallowance of Provision towards Creditor
14. Reopening of Assessment
15. Long Term Retention Bonus
16. Software Expenditure as Capital Expenditure
17. Levy of Interest under Sections 234B and 234D
18. Penalty under Section 271(1)(c)

Detailed Analysis:

1. Validity of Reference to Transfer Pricing Officer (TPO):
The assessee did not press this issue. Consequently, the ground regarding the validity of the reference to the TPO was dismissed as not pressed.

2. Fresh Comparable Search by TPO:
Similarly, the assessee did not press this issue, leading to its dismissal as not pressed.

3. Rejection of Comparable Uncontrolled Price (CUP) Method:
This issue was also not pressed by the assessee and was dismissed accordingly.

4. Capacity Under-utilization Adjustment:
The assessee claimed an adjustment for under-utilization of capacity due to business recession. However, the claim was rejected due to the lack of necessary details and evidence regarding the level of capacity utilization compared to comparable companies.

5. Determination of Arm's Length Price (ALP) and TP Adjustment:
The TPO selected 20 comparable companies and computed an average PLI of 23.65%, leading to an adjustment under Section 92CA. The assessee sought the exclusion of 15 companies, citing functional dissimilarities and other issues. The Tribunal directed the TPO/AO to re-evaluate the comparables, applying proper turnover and RPT filters, and to recompute the ALP accordingly.

6. Erroneous Data Used by AO/TPO:
The Tribunal acknowledged that the TPO used non-contemporaneous data not available in the public domain at the time of the transfer pricing study. The TPO/AO was directed to use appropriate and contemporaneous data.

7. Non-Allowance of Appropriate Adjustments to Comparable Companies:
The Tribunal noted that the TPO did not allow appropriate adjustments for differences in accounting practices, marketing expenditure, R&D expenditure, and risk profiles. The TPO/AO was instructed to consider these adjustments under Rule 10B.

8. Variation of 5% from Arithmetic Mean:
The Tribunal directed the TPO/AO to grant the benefits of the proviso to section 92C(2) regarding the 5% variation from the arithmetic mean.

9. Validity of DRP Directions and Final Order:
The assessee did not press these grounds, leading to their dismissal as not pressed.

10. Addition on Account of Provisions:
The Tribunal found that the provision towards Long Term Retention Bonus was an ascertained liability and directed the AO to allow the claim after verification.

11. Rent Equalization Provision:
The Tribunal upheld the addition made by the AO due to the lack of evidence supporting the liability for rent equalization.

12. Disallowance under Section 14A:
The Tribunal confirmed the disallowance of administrative expenses but deleted the disallowance of interest expenditure, noting that the assessee had not incurred any interest expenses.

13. Disallowance of Provision towards Creditor:
The Tribunal allowed the claim for telephone expenses payable to Tata Teleservices but upheld the disallowance of office rent and repairs and maintenance expenses due to non-compliance with TDS provisions. The issue of repairs and maintenance expenses was remanded to the AO for further examination.

14. Reopening of Assessment:
The assessee did not press this ground, leading to its dismissal as not pressed.

15. Long Term Retention Bonus:
The Tribunal allowed the claim for long term retention bonus, directing the AO to verify the quantum and allow the claim accordingly.

16. Software Expenditure as Capital Expenditure:
The Tribunal remanded the issue to the AO for re-adjudication after verifying the nature of the expenditure from invoices/bills.

17. Levy of Interest under Sections 234B and 234D:
The Tribunal noted that the levy of interest under these sections is mandatory and consequential.

18. Penalty under Section 271(1)(c):
The Tribunal found that the initiation of penalty proceedings under Section 271(1)(c) was premature.

Conclusion:
The appeals were partly allowed, with directions for re-evaluation and re-adjudication on various grounds. The Tribunal emphasized the need for proper verification and application of appropriate filters in determining the ALP and TP adjustments.